JUDGMENT No. 149.782 CATCHWORDS Bankruptcy - creditor's petition - act of bankruptcy alleged was the suspension of the payment of debts - an agreement to call a meeting of creditors did not necessarily amount to notice of suspension or intention to suspend payment of debts - no communication or notice of the suspension or intended suspension of the payment of debts - act of bankruptcy must be strictly and properly proved. Bankruptcy Act 1966 No. 1214 of 1986 ADRIANUS CORNELIS PENNING & DEBRA JOY PENNING ex parte STATE BANK OF SOUTH AUSTRALIA FORSTER, J. ADELAIDE 23 DECEMBER, 1987 ' F S . a > WN aye O37 { w Naw ow if $Drebh cue OF f, aa ESET ST. rn Fhichab / ys ALCIST PY aa llr ae IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY } GENERAL DIVISION No. 1214 of 1986 BANKRUPTCY DISTRICT OF THE STATE ee ww OF SOUTH AUSTRALIA Re: ADRIANUS CORNELIS PENNING and DEBRA JOY PENNING Debtors Ex Parte: STATE BANK OF SOUTH AUSTRALIA A Creditor JUDGE MAKING ORDER FORSTER J. ADELAIDE WHERE MADE DATE OF ORDER 23 DECEMBER, 1987 THE COURT ORDERS THAT: 1. The petition be dismissed with costs. Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. 1214 of 1986 BANKRUPTCY DISTRICT OF THE STATE wee ewe Sw OF SOUTH AUSTRALIA Re: ADRIANUS CORNELIS PENNING and DEBRA JOY PENNING Debtors Ex Parte: STATE BANK OF SOUTH AUSTRALIA A Creditor REASONS FOR JUDGMENT FORSTER J. : The State Bank of South Australia ("the Bank") petitions for the sequestration of the estates of Adrianus Cornelis Penning ("Penning") and his wife Debra Joy Penning ("Mrs. Penning"). The act of bankruptcy alleged in the petition is contained in s.40(1)(h) of the Bankruptcy Act 1966 which is as follows: "40(1) <A debtor commits an act of bankruptcy... (h) if he gives notice to any of his creditors that he has suspended or is about to suspend payment of his debts." Penning and Mrs. Penning have given notice of opposition to the petition upon the following grounds stated in the notice: "1. The debtors deny and dispute that they are justly and truly indebted to the creditor in the sum specified in the petition. 2. The debtors deny that within six months before the presentation of the petition they committed the act of bankruptcy specified in the petition or any act of bankruptcy. 3. Alternatively if the debtors are indebted to the creditor in the sum specified in the petition, or in any amount, (which is denied) then the debtors say that they have a right to claim against the creditor an amount equal to or exceeding the amount of the debt owed by the debtor to the creditor." For convenience I deal first with ground 2. It is said by the Bank that notice that the Pennings had suspended or were about to suspend payment of their debts was given by the words and conduct of Penning at a meeting on 26 August 1986 with various senior officers of the Bank and one Broome, a_ chartered accountant. What was said at that meeting is of critical importance and it is necessary to examine carefully the evidence of the various participants at the meeting. Before dealing with the meeting it will be necessary to give a brief background of what had occurred prior to the meeting taking place. In February 1985 the Pennings, of whom Penning was the active partner, purchased the Weinkeller Restaurant at Jacobs Creek in the Barossa Valley. Money was borrowed from the Commonwealth Savings Bank and the Commonwealth Development Bank in order to finance the purchase of the restaurant. Penning had a plan to establish a motel to be run in conjunction with the restaurant and having obtained council approval for his plan to erect 'A' frame units on the land, on which the restaurant stood, Penning applied to the Bank through a finance broker for money to finance the building of the units. A fully drawn advance of $760,000 was approved by the Bank and the erection of the units began. Loans from the State Bank were secured by a mortgage over real estate and a bill of sale over chattels. At the end of June 1986 the adding of interest to the sums of money already advanced and the fees and other expenses paid on behalf of the Pennings brought their account over' the limit set. From April 1986, continuing until June 1986, Penning was negotiating with the Bank for a further loan to enable the completion of the motel units and landscaping and other necessary works. The Bank refused further advances and Penning tried to get money elsewhere. There were a number of meetings between Penning and officers of the Bank in attempts to resolve Penning's difficulties and finally the meeting of 26 August 1986 took place. Those present at this meeting were Penning and Mrs. Penning, Bertram the Bank's in-house solicitor and his subordinate McKenzie, Doubell the manager (general lending) at the head office of the Bank, Wigley the commercial lending manager of the Pirie Street branch of the Bank and one Broome a chartered accountant not employed by the Bank. Mrs. Penning was late arriving at the meeting and took very little active part in it. By this time the Pennings had separated and Penning effectively carried on all negotiations with the Bank on behalf of the partnership. The respective accounts of the various attenders at the meeting of what was said and done, vary somewhat as one would expect. The recollections of some, notably Wigley and Doubell, were imperfect. I do not think that any deliberate untruths were told, but in some respects some witnesses were, in my view, mistaken. However this may be, the substance of what was. said and done is tolerably clear. Penning thought that the purpose of the meeting was to discuss Penning's application for additional finance from the Bank. Penning was led into this frame of mind by the words of Doubell who telephoned him to ask him to attend the meeting. Penning came prepared with figures with respect to the restaurant and projections with respect to the future of the restaurant and motel. At the beginning of the meeting there was a discussion of those figures and plans in which the principal participants were Broome and Penning. Broome carried out a superficial analysis of the figures provided by Penning and gave it as his opinion that although the restaurant was no doubt profitable the combined operation of the restaurant and motel was unlikely to succeed financially because of the large interest bill with respect to the borrowings from the Bank. Soon after this expression of opinion, Bertram served upon Penning and Mrs. Penning a notice of demand for payment of $848,795.08 the sum said to be due to the Bank under its securities. Penning was somewhat taken aback at the totally unexpected turn the meeting had then taken. He says that he was "in shock" and I can believe this. Penning said to Bertram words to the effect "I do not have that sort of money on me", and "I have not got the money in my pocket". Bertram says that he then asked Penning if he wanted time to pay, Bertram says that Penning declined this offer. Penning says that he said he did want time to pay to see if a proposed time sharing arrangement for the motel units or some arrangement with an investor or investors could be reached. Broome says that after Bertram had served notices of demand there was a short discussion "as to whether they needed some time to make payment". Broome does not say however what the effect or result of that short discussion was. No other participant at that meeting said anything about the offer of time to pay or Penning's response. I have found this matter difficult to resolve, but have finally come to the conclusion that Bertram did ask if the Pennings wanted time to pay and that Penning said they did. I am certainly not satisfied that he said that they did not want time to pay. Very soon after this conversation between Bertram and Penning, Bertram served upon each of the Pennings a notice appointing Broome as receiver of the whole undertaking of the restaurant and motel. Both of these notices, that is the notice of demand and the notice of appointing a receiver, were of course prepared by Bertram before the meeting. Broome knew of them and I consider it probable that Wigley and Doubell also knew of them. After service of the notice appointing Broome receiver a discussion took place between Broome and Penning in the course of which Broome advised Penning that a meeting of creditors should be called and Penning said that he was prepared to co-operate with Broome and would provide a list of creditors. I cannot be certain of the precise words used by Broome and Penning, but I am in no doubt that the calling of a meeting of creditors was Broome's idea. Penning considering that he must co-operate with Broome agreed to do so. Penning says that his understanding was that the meeting of creditors was called so that "this appointee of the Bank" could explain what was happening. Particulars of the ground alleged in the petition were given in the affidavit of Bertram. Paragraph 12 of this affidavit is as follows: "12. Mr. Penning stated words similar to the following. 'I will co-operate and call a meeting of our creditors to advise them that we are suspending payment to our creditors'." Apart from this assertion in the affidavit there is no evidence, even from Bertram himself, that anything of the sort was said beyond Penning's statement that he would co-operate and I do not believe that he ever said words to the effect of "to advise them that we are suspending payment to our creditors". "A creditor's petition must be ywerified by his affidavit but on the hearing of the pet ifion the Court is directed to require proof of the debt of the petitioning creditor and of the act of bankruptcy". (Parsons v Bunge (1941) 64 CLR 421 per Starke J. at 429). It seems to me that the inaccurate paragraph 12 of Bertram's affidavit does not preclude the Bank from proving the act of bankruptcy in some other way. "... it is perfectly clear that to constitute this act of bankruptcy two things are requisite: first, an intention residing in the mind of the debtor that he will, in a sense voluntarily, that is, as his own act, refuse to pay his debts as they become due, and, secondly, a communication of that intention to one of his creditors." (Cropley's Ltd. v Vickery & Ors (1920) 27 CLR 321 at 325 per Knox C.J.) It is clear to me that neither Penning nor Mrs. Penning intended to refuse to pay their debts as they became due, rather, they were effectively prevented from doing so by the appointment of the receiver. Nor did they or either of them intend to give notice to their creditors that they had suspended or were about to suspend payment of their debts. In Re Francis (1941) 12 ABC 111 at 115 per Lukin J. there appears the following: "If it were shown that the debtor did not actually intend to give the notice, but nevertheless that the creditor did understand that that was his intention, or that from the nature of the words used it must be presumed against the debtor that the creditor must have concluded that that was the debtor's intention, then I think on the authorities that the section would apply. As is said in the passage quoted by Lord Hanworth in In re a Debtor ((No. 737 of 1928) (1929) 1 Ch. 362: 13 B. & C.R. 130 at p.136): 'Attention must be directed to what the words convey to the persons to whom they are spoken' ." The question therefore remains, as to whether what Penning said, conveyed to the Bank that the Pennings had suspended payment of their debts or were about to do so. It is argued that by agreeing, albeit at Broome's suggestion, to meet their creditors in order to see if the restaurant could be carried on, at least for a time, the Pennings were giving notice to the Bank that they had suspended payment of their debts. It is argued that the Bank is entitled to interpret the calling of the meeting of creditors as being a statement that they had decided to suspend payment of their debts. It is said that notice of an intention to deal with the creditors collectively may amount to a notice that they have suspended or are about to suspend payment of their debts (Official Assignee of Simon v Arnold and Wright Ltd. (1967) N.Z.L.R. 552). So indeed agreement to call a meeting of creditors may amount to notice of suspension or intention to suspend payment, but it does not necessarily do 80. No-one from the Bank either senior or junior who was or was not at the meeting on 26 August 1986 gave evidence that he interpreted Penning's words or actions as such a notice or as indicating such an intention. The officers of the Bank who were present at the meeting must have known that the meeting of creditors was being called at the suggestion of Broome who was the receiver appointed by the Bank and in the absence of any evidence as to how Penning's concurrence in the calling of the meeting was regarded by the Bank I am quite unable to find that there has been "a communication of that intention (i.e. to suspend payment) to one of his creditors". I am equally unable to find that there has been a communication or notice at the meeting of 26 August of the fact that the Pennings had suspended payment of their debts. The evidence is rather that they were limping along financially paying the most importunate and trying desperately to remain afloat. Whether or not the Pennings are hopelessly insolvent, as is said, an act of bankruptcy alleged strictly and properly proved. against them must be In my view this has not been done and whatever the future may hold this petition must be dismissed with costs. Counsel for the debtors Solicitors for the debtors Counsel for the creditor Solicitors for the creditor Dates of hearing I certify that this and the * preceding pages are a true copy of the Reasons for Judgment of Mr Justice Forster. associate: Mack a! i ' a" J how loan Dated: 23 "Vecemoer , \VEF oo Mr J. Cudmore Norman, Waterhouse & Mutton Mr H.C. Williams Q.C. with Mr R.J. Lindquist Barratt Lindquist 1-5 June, 13-14 July, 3, 23 November, 1987